A look at the day ahead in U.S. and global markets from Mike Dolan
Thanks largely to a stabilisation of bond markets and an ebbing of the super-strong dollar, global stocks caught a rare new year bid on Tuesday with critical inflation and corporate earnings updates now in view.
A slightly bizarre narrative developed behind Monday’s bounce in stocks, with some citing a Bloomberg report claiming President-elect Donald Trump’s team is studying gradual tariff hikes – using emergency legislation to boost import duties 2%-5% per month until they wreak concessions from trade partners.
While it may have sown some relief that larger one-off tariff rises are not coming as soon as next week, the prospect of months – or even years – of drip-fed tariff hikes, and serial threats of such, doesn’t sound like a recipe for smooth market sailing or easier inflation concerns ahead.
Nevertheless, this year’s relentless selloff in Treasuries has paused at least over the past 24 hours and a slightly more positive posture there filtered through Wall Street stocks and out across the world overnight.
With December producer and consumer price reports due out today and Wednesday, respectively, 10-year benchmark Treasury yields have dialled back from 14-month highs above 4.8% hit on Monday and 30-year ‘long bond’ yields are balking at 5% for now.
Helping the mood on Monday was the release of the New York Fed’s December consumer survey, which painted a more mixed picture of public inflation expectations than a sparkier University of Michigan readout last Friday. The latter had aggravated bonds’ post-payrolls swoon late last week.
The NY Fed poll showed households’ expected path of inflation a year from now remained steady at 3%. While the 3-year view rose to 3% from 2.6% in November, the 5-year view ebbed to 2.7% from 2.9%.
This saw Fed futures find their feet and the market is back pricing one interest rate cut this year – by October – compared to a scenario early yesterday morning that showed none fully priced for the whole of 2025. A stalling of crude oil prices, which hit four-month highs on Monday on the latest U.S. sanctions on Russia, also calmed the bond market horses a bit.
However, annual headline and ‘core’ U.S. producer price inflation readings due later on Tuesday are expected to see a significant pickup up in 3.4% and 3.8% respectively.
And more importantly, tomorrow’s consumer price report is expected to show the ‘core’ annual inflation rate stuck as high as 3.3% last month.
Market inflation expectations embedded in Treasury inflation-protected securities are now just a whisker from 2.5% for the first time since October 2023. The NY Fed’s estimate of the so-called ‘term premium’ demanded by investors to hold 10-year Treasuries, meantime, hit almost 65 basis points on Monday for the first time since September 2014.
But brief stabilisation in nominal yields has acted as a balm more widely.
Even though the tech-heavy Nasdaq closed lower again on Monday, the S&P500 bounced off its lowest level since the November election day and eked out a small gain by the close. And, with stock gains stretching out across Asia and European bourses, Wall Street futures are up another half percent ahead of Tuesday’s bell.
The fourth-quarter earnings season starts in earnest on Wednesday, with many of the big banking names kicking the updates off as usual.
The dollar stepped back with Treasury yields too, retreating from 2-year highs. Ailing sterling bounced from 14-month lows as British government bonds stabilised in line with Treasuries, with which they have been joined at the hip all year.
Chinese stocks were a standout gainer overnight, with the mainland CSI300 clocking a rise of 2.7% and staging its best day since November 7.
With domestic regulators pledging more market support on Monday to address the worst start to a calendar year in a decade, local chip firms also rallied after the U.S. stepped up its tech curbs.
But the reports about more gradual U.S. tariff rises may also have helped and traders are awaiting Friday’s swathe of monthly economic releases, including fourth-quarter Chinese GDP data.
Investments in governments bonds are not risk-free, Chinese central bank official Zou Lan said on Tuesday, warning of a potential market bubble and resulting turbulence if bond yields depart from economic fundamentals. Fast falling Chinese bond yields have been complicating Beijing’s efforts to stabilise a weakening yuan and the People’s Bank of China suspended treasury bond purchases in January.
What’s more, the annual travel rush for China’s Lunar New Year celebrations officially began on Tuesday, with many taking a break to reunite with family or take a holiday ahead of the Jan 29 new year celebration.
Back stateside, the inflation news will dominate sentiment this week, but the release of December retail sales on Thursday will also give an important take on the holiday shopping season.
Key developments that should provide more direction to U.S. markets later on Tuesday:
* US December producer price report, NFIB Dec small business survey
* New York Federal Reserve President John Williams and Kansas City Fed President Jeffrey Schmid both speak
(By Mike Dolan, editing by Christina Fincher; [email protected])
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